VA puts reverse auctions on hiatus again to study value proposition

Jason Miller, executive editor, Federal News Radio

For the second time in the last two years, the Veterans Affairs Department decided
to stop using reverse auctions to buy products and services.

The decision comes as lawmakers are growing more concerned about whether agencies
are paying higher than necessary prices and not getting adequate competition from
this increasingly popular procurement approach.

The exact reason behind VA's decision is unclear.

Jan Frye, the deputy assistant secretary in VA's office of acquisition, logistics
and construction, told a joint hearing of the House Veterans Affairs and Small
Business committees Wednesday that the department is conducting another review of
this procurement approach.

"VA is evaluating the value proposition of reverse auctions. Specifically, the
Veterans Health Administration is crunching the numbers in an effort to evaluate
whether the dollar, time and process efficiencies estimated by the advocates of
these tools are being realized," Frye said. "Efficiencies alone cannot be the only
measure of value. The reverse auction process is also being evaluated to ensure
compliance with regulation and policy."

Frye said VA also is aware of small business concerns, which was part of the
reason VA decided to pause its use of reverse auctions in March 2012.

But since that initial pause, VA's use of reverse auctions has steadily increased.
In 2011, VA conducted 2,261 reverse auctions and spent about $78 million. In 2012,
VA held 7,587 reverse auctions worth $305 million. Of that, 79 percent of the
awards went to small businesses.

In all, VA spent more than $17 billion on goods and services last year, so $305
million isn't a great deal of money, generally speaking.

Dramatic growth over last five years

But lawmakers and industry associations are growing concerned as agencies use
reverse auctions more and more, and see the impact on small businesses.

The Government Accountability Office released a report earlier this
week and testified at the hearing about what it found in looking at the top four
agencies that used reversed auctions the most. Michele Mackin, a director of
acquisition and sourcing management at GAO, said VA, the departments of Homeland
Security, Interior and the Army accounted for 70 percent of all reverse auctions
in 2012. Across the government, Mackin said the use of reverse auctions increased
by 175 percent over the last five years and agencies spent more than $800 million
through this tool.

This growth is part of the reason the two committees are reviewing the policies
and laws guiding reverse auctions.

Additionally, this is the second time VA has suspended the use of reverse of
auctions and that attracted the attention of legislators. Back in 2012, Frye said
there were several reasons for the pause, including an outcry by small businesses.

"One of the things we noticed in March of 2012 when we put a moratorium in place
was that the prices that were touted as savings or savings valued were being
provided by the reverse auction firm, FedBid. We didn't think that was probably
the way to go," Frye said. "So one of the things we required as we put a new
policy in place and promulgated that policy was that for VA, or more specifically
VHA contracting officers, were required to calculate those savings and document
the file with regard to those savings."

Much of the hearing focused on VA's use of FedBid as a reverse auction provider,
as well as GAO's findings.

Most of the time agencies pay a fee of 3 percent of the total price of the
contract, which is capped at $10,000, to FedBid for the reverse auction services.

Both Mackin and lawmakers say the concerns over reverse auctions have little to
nothing to do with FedBid. It's more about how agencies are using reverse
auctions.

Missing real competition?

Mackin said her biggest concerns center on competition and presumed savings from
reverse auctions.

"Regarding competition, we found two main buckets. What we call interactive
bidding where multiple vendors are bidding against each other. This happened 65
percent of the time," Mackin said. "However, there is also what we call
ineffective competition where only one vendor submitted a bid or multiple vendors
submitted only one bid each. This happened about 35 percent of the time, and
clearly there are concerns here about whether the benefits of competition is being
realized."

Auditors also found FedBid's savings calculation could be faulty. Mackin said
FedBid estimated a savings of $98 million in 2012 across the four agencies GAO
analyzed.

"We have questions about the accuracy of these savings. For example, if there was
no interactive bidding, agencies perhaps could have gotten a better price using
other mechanisms," she said. "Also, the target price or government estimate may
not be sound. For example, we found over 1,000 cases where the winning bid
actually exceeded the government's estimate even with interactive bidding."